Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Sunday, December 23, 2012

Securities Industry Urges US Supreme Court to Reverse Second Circuit Expansion of Class Action Status for Purchasers of Mortgage-Backed Securities

In
an amicus brief filed with the US Supreme Court, the securities industry asked
the Court to review and reverse a ruling by a Second Circuit panel that class standing permits purchasers of mortgage-backed
securities to assert claims under the Securities Act on behalf of absent class
members that purchased mortgage-backed securities that the named plaintiff did
not itself purchase so long as the claims implicate the same or a similar set
of concerns. The Court was urged to clarify that merely adding class
allegations does not permit plaintiffs to assert claims they lack standing to
assert on their own. The US Chamber of Commerce was also on the brief. The
Court is slated to consider the certiorari petition in this case at its January
4, 2013 conference. Goldman Sachs & Co., et al. v. NECA-IBEW Health &
Welfare Fund, Dkt. No. 12-528.

The Second Circuit’s analysis has a basic flaw, said
SIFMA, in that there is no such thing as “class standing.” To the contrary,
that a suit may be a class action adds nothing to the question of standing. The
standing analysis is the same regardless of whether a plaintiff purports to act
on behalf of a class. Here, the plaintiff’s standing is limited by the
Securities Act, which expressly permits a plaintiff to sue only with respect to
the particular security it purchased.

The more specific question
is whether purchasers of mortage-backed securities from one tranche of an offering
have standing to represent a class that includes purchasers of different
tranches of the same offering, orother mortgage-backed securities
offerings, based on the same shelf registration.
Mortgage-backed securities are divided into tranches with different rights,
risk profiles and rates of return, noted amici, and each tranche is a separate
and unique security with its own CUSIP.

The differences among such offerings are particularly
acute, explained SIFMA, because each offering is backed by a unique
securitization pool that typically does not exist until the specific
mortgage-backed security is structured. To SIFMA’s knowledge, the Second
Circuit ruling is the only decision in which a court concluded that such
plaintiffs have standing to pursue a claim on behalf of purchasers of different
mortgage-backed securities.

The Second Circuit’s “similar” or “same” set of
concerns standard is also vague and indeterminate, argued amici, in contrast to
the statutory test. It rewards a plaintiff that pleads its claim broadly and
would unjustifiably multiply defendants’ potential liability under the
Securities Act, further burdening already busy courts and resulting in
increased vexatious litigation and coercive settlements to the detriment of the
nation’s

economy.

Amici also predicted that the Second Circuit’s decision,
if left intact, would not be limited in application to litigation involving
mortgage-backed securities. Rather, the Second Circuit established a broad
standard for determining class standing in any putative class action, whether
the putative class claims concern violations of the federal securities laws
related to mortgage-backed securities, other types of securities, or any other
statutory or common law violation. The Second Circuit’s new standard will
magnify the existing confusion among the lower courts regarding standing,
creating uncertainty and inconsistent outcomes, as well as cumbersome litigation
regarding the “same” or “similar” concerns standard.

In determining that the plaintiff below had standing to
pursue claims on behalf of purchasers of securities it did not itself purchase,
continued SIFMA, the Second Circuit ignored the limits on standing imposed by the Securities
Act itself. Although Sections 11 and 12(a)(2) impose near strict liability for
material misrepresentations in a registration statement or prospectus, they
authorize only an actual purchaserof the particular security
described in the offering materials to sue.